Credit

Cook County Residents To Get Hit With Tax Hikes Soon?

For a while now (last time being earlier this week), I told my girlfriend we were lucky to have escaped the fiscal debacle and revenue grab going on in the city of Chicago.

At the same time, I pointed out that as Cook County residents we’re still on the hook for the same type of nonsense.

Brian Slodysko reported on the Chicago Sun-Times website yesterday afternoon:

Hoping to ward off another credit rating downgrade, Cook County Board President Toni Preckwinkle said Wednesday that she will soon present a plan to reform the county’s underfunded pension system.

And she’s leaving the door open to hiking property, sales and other taxes.

When asked repeatedly about the possibility of tax increases, Preckwinkle responded: “We’re looking at all the options. Everything is on the table.”

(Editor’s note: Bold added for emphasis)

Slodysko added later in the piece:

Preckwinkle declined to discuss specifics, but she did say that any plan that goes before the Legislature will not have property tax increase language written into the bill

(Editor’s note: Bold added for emphasis)

Okaaay… so that means Preckwinkle’s not “leaving the door open” to hiking property taxes?

Regardless, based on what I see coming down the line for us, it’s only a matter of time.

Last summer, Cook County saw its bond rating lowered by one of the major credit rating agencies supposedly due to its public pension liabilities. I blogged on August 20, 2013:

In the wake of significantly downgrading the City of Chicago’s credit rating, bond credit rating giant Moody’s Investor Service lowered Cook County’s bond rating a notch last Friday. In a news release from the Moody’s website right before the weekend:

New York, August 16, 2013 — Moody’s Investors Service has downgraded the rating on Cook County’s (IL) general obligation (GO) debt to A1 from Aa3, affecting $3.7 billion of general obligation debt. The outlook remains negative.

SUMMARY RATING RATIONALE

The downgrade of the GO rating reflects Cook County’s growing pension liabilities…

(Editor’s note: Bold added for emphasis)

Stay tuned…

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

Source:

Slodysko, Brian. “Preckwinkle won’t rule out tax increase to strike pension deal.” Chicago Sun-Times. 9 Apr. 2014. (http://politics.suntimes.com/article/chicago/preckwinkle-wont-rule-out-tax-increase-strike-pension-deal/wed-04092014-523pm). 10 Apr. 2014.

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Moody’s Downgrades Chicago’s Credit Rating Again, Issues Negative Outlook

Just as I was about to blog about prepping tonight I observed the following splashed on the homepage of the Chicago Tribune website:

Chicago credit rating takes major hit

Chicago’s financial standing took a hit Tuesday when a major bond rating agency once again downgraded the city’s credit worthiness…

No surprise there, all things considered. No real effort has been made to tackle Chicago’s financial woes, which led to bond credit rating giant Moody’s Investor Service downgrading the City of Chicago’s general obligation (GO) and sales tax ratings to A3 from Aa3, water and sewer senior lien revenue ratings to A1 from Aa2, and water and sewer second lien revenue ratings to A2 from Aa3 back on July 17, 2013.

After seeing that headline, I decided to head over to Moody’s Investors Service website to check out the latest “Ratings News,” where the following was posted:

Rating Action: Moody’s downgrades Chicago, IL to Baa1 from A3, affecting $8.3 billion of GO and sales tax debt…

Also downgrades water and sewer senior lien revenue bonds to A2 from A1 and second lien revenue bonds to A3 from A2, affecting $3.3 billion of debt; outlook negative for all ratings…

According to Moody’s, “Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.”

Their Global Credit Research unit added:

The Baa1 rating on Chicago’s GO debt reflects the city’s massive and growing unfunded pension liabilities, which threaten the city’s fiscal solvency absent major revenue and other budgetary adjustments adopted in the near term and sustained for years to come. The size of Chicago’s unfunded pension liabilities makes it an extreme outlier, as indicated by the city’s fiscal 2012 adjusted net pension liability (ANPL) of 8.0 times operating revenue, which is the highest of any rated US local government. While the Illinois General Assembly’s recent passage of pension reforms for the State of Illinois (A3 negative) and the Chicago Park District (CPD) (A1 negative) suggests that reforms may soon be forthcoming for Chicago, we expect that any cost savings of such reforms will not alleviate the need for substantial new revenue and fiscal adjustments in order to meet the city’s long-deferred pension funding needs. We expect that the city’s pension contributions will continue to fall below those based on actuarial standards. The city’s slowly-amortizing debt levels are also large and growing. The Baa1 rating also incorporates credit strengths including Chicago’s large tax base that sits at the center of one of the nation’s most diverse regional economies and the city’s broad legal authority to raise revenue…

You can read the entire Moody’s piece about the downgrade on their website here.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

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Chicago, The Writing Is On The Wall

The city of Chicago is in for some tough times down the road.

“The Machine” keeps putting a positive spin on the city’s deteriorating financial condition, but the numbers don’t lie. I’ve rattled them off time and time again, the most recent being Tuesday. The Chicago press (sans Fran Spielman over at the Chicago Sun-Times and a few others) has even caught on, publishing articles with more frequency these days that reveal just how ugly the city’s finances truly are. Case in point, a Chicago Tribune editorial entitled “Chicago is on the road to Detroit” that appeared on their website yesterday. From the piece:

By the most recent numbers, Mayor Rahm Emanuel’s government owes $13.9 billion in general obligation bond debt, plus $19.5 billion in unfunded pension obligations. Add in Chicago Public Schools and City Hall’s other “sister agencies” and you’re talking billions more in debts that Chicago taxpayers owe. Yet here we are on a Wednesday when the mayor probably will get approval from a derelict City Council to issue another up-to-$900 million in bonds backed by property taxes — and to double, to $1 billion, the amount of short-term bank money his administration can borrow to raise cash…

(Editor’s note: Italics added for emphasis)

By the way, Mayor Emanuel got that approval. Fran Spielman reported on the Chicago Sun-Times website Wednesday morning:

Without a word of debate, the City Council on Wednesday blindly added $1.9 billion to Chicago’s mountain of debt even though aldermen have no idea how the money will be spent.

The vote was 43-to-4. “No” votes were cast by Aldermen Bob Fioretti (2nd), Scott Waguespack (32nd), Brendan Reilly (42nd) and John Arena (45th)…

Now, I’ve heard/read some Chicagoans say something along the lines of don’t worry about the city’s finances, Governor Quinn and the State of Illinois or President Barack Obama and the federal government will ride to the rescue of their fellow Democrats in control of the “Windy City.”

To which I say, I’m not so sure. Is there anyone in America who doesn’t know how much of an economic basket case the “Land of Lincoln” is? A $100.5 billion public pension debt and the worst credit rating of all 50 U.S. states routinely make headlines across the country. As for the federal government, I keep encountering the words “insolvent” and “bankrupt” more and more these days to describe the nation’s finances. And don’t think for a second other economically-challenged cities across the country won’t cry foul to the Oval Office and their elected representatives if Chicago is bailed out. I find it hard to believe the State of Illinois or the Feds could come to Chicago’s rescue without there being serious financial and political repercussions.

Chicago, the writing is on the wall. By the looks of things, that great city where I was born and from which I recently just left is now past the proverbial point of no return, no longer looking capable of effectively navigating the growing financial crisis.

While I don’t foresee the city’s death, I do envision a continuation of its already gradual decline until a point of fiscal implosion is reached. Will it be Detroit-esque in its bottoming out? I don’t know. But it sure as hell won’t be pretty.

Faced with such a scenario, will Chicagoans choose to stay and contend with the almost certain prospect of much higher taxes and fees in conjunction with curtailed city services (public safety comes to mind here), or will they depart the “Second City” like I did?

One might think the latter (going), but I’m sure there will be plenty of the former (staying).

In the interests of surviving and prospering, which is the better choice?

I don’t think the answer is as clear-cut as many readers might think. And it’s something I’ll be exploring and blogging about more in the coming days.

By Christopher E. Hill
Survival And Prosperity (survivalandprosperity.com)

Sources:

“Chicago is on the road to Detroit.” Chicago Tribune. 5 Feb. 2014. (http://www.chicagotribune.com/news/opinion/editorials/ct-chicago-debt-edit-0205-20140205,0,3757189.story). 6 Feb. 2014.

Spielman, Fran. “City Council OKs going $1.9 billion deeper into debt.” Chicago Sun-Times. 5 Feb. 2014. (http://www.suntimes.com/25398572-761/city-council-oks-going-19-billion-deeper-into-debt.html). 6 Feb. 2014.

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Growing Illinois Fiscal Fiasco Makes Wisconsin Relocation More Attractive

Regular readers of Survival And Prosperity may recall me blogging from time to time that as things stand, Wisconsin- not Illinois- looks to be my primary state of residence down the road. For example, I wrote back on January 29 of last year:

By the time I started this blog back in November 2010, I already had a pretty good idea I’d eventually be leaving the city of Chicago to reside someplace else. And every once in a while, I’d query the “best places” to live in America- should TSHTF or not. While the area of southeastern Wisconsin I’m looking at moving to in a few years is probably not “ideal” (even less so the suburbs of Chicago) from a prepper’s perspective, practitioners of modern survivalism would probably see more positives than negatives with the location. Keeping in mind that not only do I envision a certain lifestyle for myself down the road, but I also think I have a pretty good idea of what will be required to “survive and prosper” in America in the coming years, this part of the Midwest really appears to be a nice fit not only for me but my girlfriend as well. Here’s hoping it is…

Sure, certain Wisconsin taxes tend to be higher than in the “Land of Lincoln.” But at least it’s not a fiscal basket case, where I can envision Illinois one day leapfrogging our neighbors to the north when it comes to levels of revenue collection.

Chicago Tribune columnist Dennis Byrne reminded the paper’s readers just how precarious our financial situation has gotten here in Illinois… in addition to suggesting a state we might want to consider emulating. He wrote on the Tribune website on January 28:

Illinois is a stinking mess.

A steaming heap of suffocating debt, endless greed, blind self-interest and numbing incompetence. How we’ve been able to survive this long without plunging into the abyss is beyond me, and all reason.

No need here to document all of the state’s failures. Way behind on its bills. The nation’s worst credit rating. Higher unemployment than the nation. Business wanting to scram, fed up with an unfriendly entrepreneurial climate. Crushing pension obligations so far into the future that no one alive today, even if they ponied up every cent they made (after taxes, of course), will ever see the end of it.

Illinois is run by a self-renewing, power-hungry, piggish oligarchy so impervious to change (I hesitate to use the word reform, because true reform is as rare in Illinois as is the sight of Pike’s Peak) that it makes feudalism look good.

Don’t try to argue that a recent package of minor changes to the public employees’ pension system, grudgingly enacted by the serfs in the state legislature, is reform. Even if it were, it’s going nowhere because it will be dead on arrival in Illinois’ courts. That’s because the hoggish public employee unions were able, at the last minute, to ram into the state constitution a provision that guarantees their cupidity will be fed, well, forever.

What makes it all so vexing is how close the answer to our problems is: Wisconsin.

While Illinois is circling the drain, Wisconsin has saved itself from a similar fate and, in the aftermath of the longest-lasting recession since Amelia Earhart became the first woman to fly solo across the Atlantic Ocean, is actually doing OK, if not prospering…

“Prospering.”

It’s been a long time since I’ve heard/seen that word associated with Illinois.

Which is too bad, because I really do love this state and my fellow Illinoisans.

But seeing as my goal remains not only to survive but prosper as the times become more tumultuous, Byrne’s observation further convinces me my future still lies up north.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

Source:

Byrne, Dennis. “Illinois Should Look To Wisconsin.” Chicago Tribune. 28 Jan. 2014. (http://www.chicagotribune.com/site/ct-oped-byrne-0128-20140128,0,5528813.column). 3 Feb. 2014.

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Marc Faber Shares 2014 Predictions

“Doctor Doom” Marc Faber shared his 2014 predictions on the CNBC/Yahoo! Finance investing show Talking Numbers on December 19. The Swiss-born investment advisor and fund manager predicted the following for next year:

1. The S&P 500 won’t surpass its November 19, 2013, high of 1,813
2. Facebook, Tesla, Twitter, Netflix, and Veeva Systems are “grossly overvalued,” and shorting a basket of these stocks will return at least 30 percent next year
3. Physical precious metals, gold shares, and Vietnamese stocks are “buys”

On precious metals, the publisher of the monthly investment newsletter The Gloom Boom & Doom Report told viewers:

Given all the money printing that is going on globally- not just in the U.S.- and given that the total credit as a percent of the advanced economies is now 30 percent higher than in 2007 before the last crisis hit, I think that gold is a good insurance. So I would buy some physical gold here…

I’d rather buy something that is reasonably priced. And I think gold shares are very inexpensive. So a basket of gold shares, I think, next year could easily appreciate 30 percent.

Dr. Faber was bullish on other equities as well. He said:

I think the Vietnamese stock market, which this year was up 22 percent- which is not bad for an emerging market- will continue to go up.

You can watch the entire Talking Numbers segment with Marc Faber on the Yahoo! Finance website here.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

(Editor’s notes: Info added to “Crash Prophets” page; I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

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WSJ Calls Proposed ‘Fix’ To Illinois Public Pension Crisis ‘Fake’

Today’s the day Illinois lawmakers may vote on SB0001 to “fix” the state’s $100 billion public pension crisis.

But according to the Wall Street Journal last night, the whole thing’s a “fake.”

From the WSJ website Monday evening:

Illinois’s Fake Pension Fix

Democrats in Illinois have dug a $100 billion pension hole, and now they want Republicans to rescue them by voting for a plan that would merely delay the fiscal reckoning while helping to re-elect Governor Pat Quinn. The cuckolded GOP seems happy to oblige on this quarter-baked reform.

Legislative leaders plan to vote Tuesday on a bill that Mr. Quinn hails as a great achievement. But the plan merely tinkers around the edges to save a fanciful $155 billion over 30 years, shaves the state’s unfunded liability by at most 20%, and does nothing for Chicago’s $20 billion pension hole.

Most of the putative savings would come from trimming benefits for younger workers. The retirement age for current workers would increase on a graduated scale by four months for 45-year-olds to five years for those 30 and under. Teachers now in their 20s would have to wait until the ripe, old age of 60 to retire, but they’d still draw pensions worth 75% of their final salary.

Salaries for calculating pensions would also be capped at $109,971, which would increase over time with inflation. Yet Democrats cracked this ceiling by grandfathering in pensions for workers whose salaries currently top or will exceed the cap due to raises in collective-bargaining agreements.

Democrats are also offering defined-contribution plans as a sop to Republicans who are desperate to dress up this turkey of a deal. These plans would only be available to 5% of workers hired before 2011. Why only 5%? Because if too many workers opt out of the traditional pension, there might not be enough new workers to fund the overpromises Democrats have made to current pensioners.

At private companies, such 401(k)-style plans are private property that workers keep if they move to a new job. But the Illinois version gives the state control over the new defined-contribution plans and lets the legislature raid the individual accounts at anytime. That’s a scam, not a reform.

Even under the most optimistic forecasts, these nips and tucks would only slim the state’s pension liability down to $80 billion— which is where it was after Governor Quinn signed de minimis fixes in spring 2010 to get him past that year’s election…

(Editor’s note: Italics added for emphasis)

“Would only slim the state’s pension liability down to $80 billion.”

Sounds like this legislation would only “kick the can down the road” as the public pension crisis is concerned- once again.

I shouldn’t be surprised to read any of this.

After all, it’s what Illinois state legislators have been doing for quite some time now on this issue.

At the end of the day- including today, if a pension “fix” is signed into law- it looks as if public sector retirees participating in these particular pensions are the ones who will be most screwed.

Illinois taxpayers won’t be far behind.

Consider what Kenneth Griffin, the richest Chicagoan and Illinoisan who’s also CEO of the global financial institution Citadel Group, had to say in a Chicago Tribune piece on November 29:

The bitter truth is that our politicians have sold government employees a fraudulent bill of goods. Absent extraordinary economic growth, our state is going to collapse under the weight of generous pension promises made by union leaders and politicians. And with each passing day, the $100 billion gap between what has been promised and what is provided for grows by roughly $5 million.

Here is where this story will inevitably end: Our state is going to be forced to break its promises to our government employees and retirees. They will receive less than they bargained for. Our state’s taxpayers will see the 67 percent “temporary” tax increase converted into a permanent tax increase. And soon we will hear that even further tax increases are needed to meet our obligations. This is the price we are all going to pay for sending the wrong leaders to Springfield for too many years.

I don’t think shaving $20 billion off that total will change Griffin’s prognosis much.

An $80 billion public pension funding gap.

Wonder if that will fake out the credit rating agencies?

Something tells me it won’t, and rewinding the clock only three-and-a-half years will still leave us with an ongoing public pension crisis.

The Wall Street Journal did a nice job picking apart the proposed “fix.” You can read the entire article on the WSJ website here or on the Illinois Policy Institute’s website here.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

Source:

Griffin, Kenneth. “Guaranteeing financial ruin in Illinois.” Chicago Tribune. 29 Nov. 2013. (http://articles.chicagotribune.com/2013-11-29/site/ct-illinois-pension-reform-financia-ruin-1129-20131129_1_tax-increase-state-income-tax-bill). 3 Dec. 2013.

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Illinois State Lawmakers To ‘Fix’ $100 Billion Public Pension Crisis Tuesday?

Tuesday looks to be an important day for the future of Illinois.

State lawmakers may vote on legislation to “fix” a well-publicized $100 billion public pension crisis. Rick Pearson and Bob Secter wrote on the Chicago Tribune website yesterday:

Illinois lawmakers return to Springfield on Tuesday to consider an agreement struck by legislative leaders that aims to fix the state’s massive government worker pension as Senate Democrats have become the focal point for intensive lobbying efforts…

The pension vote is shaping up to be one of the most important votes of lawmakers’ careers, with senators and representatives forced to decide which is better for their political self-interest: Backing up their powerful leaders or siding with the re-election might of public employee unions.

At stake is Illinois’ $100 billion pension shortfall that affects teachers outside Chicago, public university employees and state government workers. The worst-in-the-nation deficit is gobbling up tax money that otherwise could go to education and other programs, and has resulted in Illinois holding the lowest credit rating among the states. Illinois’ pension problem also is being blamed in part for the state’s struggling economy and high unemployment.

The agreement leaders reached the day before Thanksgiving aims at saving the state $160 billon over 30 years to get the pension systems fully funded, largely by limiting annual cost-of-living increases and raising the retirement age while also requiring the state to put its share of money into the system.

Not surprisingly, beneficiaries of the current setup aren’t too happy with these rapidly-unfolding developments. Francine Knowles reported on the Chicago Sun-Times website yesterday:

Details of the pension deal reached by four House and Senate leaders and headed for a vote this week have supporters and critics in full-court press mode.

Union leaders, who are blasting the agreement, say their members will bombard lawmakers Monday, urging them to kill the proposed bill that could ultimately slash $160 billion from the state’s future pension liabilities and improve Illinois’ damaged creditworthiness.

Opponents of the yet-to-be-seen legislation will argue that it’s unconstitutional, among other things. Pearson and Secter added:

Any final package approved by the legislature and governor faces an almost certain legal challenge. Critics will go into court armed with a provision of the 1970 Illinois Constitution that defines pension benefits as “an enforceable contractual relationship” that “shall not be diminished or impaired.”

I’m not sure what to make of all this yet, except that the present course the State is on concerning public sector pensions is unsustainable (costing taxpayers $5 million a day as I noted back on October 21) and that any legislation passed will probably end up being legally contested.

More Wednesday…

Sources:

Pearson, Rick and Secter, Bob. “Senate Democrats under the gun on proposed pension fix.” Chicago Tribune. 30 Nov. 2013. (http://www.chicagotribune.com/news/local/ct-illinois-pension-reform-met-1201-20131201,0,7850446.story). 1 Dec. 2013.

Knowles, Francine. “Pension deal faces pushback from unions; backers pursue votes.” Chicago Sun-Times. 30 Nov. 2013. (http://www.suntimes.com/24073242-761/pension-deal-faces-pushback-from-unions-backers-pursue-votes.html). 1 Dec. 2013.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

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Moody’s Downgrades Chicago Transit Authority Bonds From Aa3 to A1, Says Outlook Negative

Moody’s Investors Service has dealt Chicago another ratings blow. In this case, it’s the Chicago Transit Authority. From a Global Credit Research news release last Friday:

New York, October 25, 2013 — Moody’s Investors Service has downgraded the Chicago Transit Authority’s $2.9 billion outstanding sales tax revenue bonds to A1 from Aa3 and revised the outlook to negative from stable. Also affected are approximately $77 million of authority lease bonds issued by the Chicago Public Building Commission, which have been downgraded to A2.

According to Moody’s rating scale, this CTA debt has gone from being “high quality” and “subject to very low credit risk” to “upper-medium grade” and “subject to low credit risk.”

The well-known credit rating agency added:

The rating assigned to the Chicago Transit Authority (CTA) sales-tax backed debt has relied partly on active management — the ability to increase pledged revenue to allow for new debt and to maintain debt-service coverage. Two main factors now indicate weaker CTA credit quality. First, in view of growing credit pressures on Chicago (A3/negative), Cook County (A1/negative), and the State of Illinois (A3/negative), we believe the political will to impose further revenue increases has diminished. Second, the CTA system faces growing deferred maintenance and capital needs that will require funding from new debt issuance and other sources, at a time when state and federal support is likely to dwindle. Despite the recent improvement in pledged revenues driven by the national economic recovery, debt service coverage levels are likely to decrease in coming years. A backlog of pledged state matching payments, though recently reduced, will remain a long-term challenge and may be exacerbated by impending state income tax cuts and the state’s massive pension deficits. CTA’s own increasing pension challenges may strain its operating budget. Together, these factors have added to the importance of distinctions between CTA’s sales-tax bonds and those issued by the Regional Transportation Authority (RTA, Aa3/stable), a transit oversight body with a prior claim on the same regional sales taxes and a more conservative additional debt limit.

You can read the entire news release on the Moody’s website here.

By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)

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Monday, October 28th, 2013 Bonds, Credit, Government, Taxes, Transportation No Comments

Illinois Senate President John Cullerton Says No State Public Pension Crisis

“Five million dollars a day. That’s the cost of Illinois’ unresolved pension crisis.”

-Jay Levine, Channel 2 News (Chicago CBS affiliate) reporter, October 18, 2013

Five million dollars a day being flushed down the toilet because Illinois politicians haven’t tackled the state’s public pension crisis.

By the way, that pension liability now amounts to a worst-in-the-nation $100 billion last I heard.

And here’s what Illinois Senate President John Cullerton said yesterday about the ongoing fiasco. From the Chicago Tribune website this morning:

“People really misunderstand the nature of this whole problem. Quite frankly, I don’t think you can use the word ‘crisis’ to describe it at the state level,” Cullerton said in an interview on WGN-AM radio.

“It’s something we have to deal with, but it’s not something that we’re on the verge of bankruptcy on,” Cullerton said.

The term “Ivory Tower” comes to mind here.

Meanwhile, it’s probably just a matter of time now before a major credit rating agency downgrades the State’s debt yet again due to the inability of the political leadership to deal with the crisis.

According to the Illinois Watchdog website, Illinois has seen its credit downgraded 16 times since 2003, with both Fitch and Standard and Poor’s currently assigning an “A-” rating to its debt.

By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)

Sources:

Levine, Jay. “Lawmakers May Take Up Pension Reform, Gun Control In Veto Session.” CBS Chicago. 18 Oct. 2013. (http://chicago.cbslocal.com/2013/10/18/lawmakers-may-take-up-pension-reform-gun-control-in-veto-session/). 21 Oct. 2013.

“Cullerton: Illinois pension debt not a ‘crisis’” Chicago Tribune. 21 Oct. 2013. (http://www.chicagotribune.com/news/politics/clout/chi-cullerton-pension-debt-not-a-crisis-but-about-lowering-taxes-20131020,0,4245590.story). 21 Oct. 2013.

Yount, Ben. “Illinois can stand as a lesson in government-gone-wild.” Illinois Watchdog. 10 Oct. 2013. (http://watchdog.org/110131/illinois-can-stand-as-a-lesson-in-government-gone-wild/). 21 Oct. 2013.

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Economists Wrong On September ‘Tapering’ Of Fed Stimulus

Look at stocks and commodities blast off this afternoon. Especially gold, which plenty of mainstream financial news outlets have been talking smack about lately.

From Greg Robb and Jeffry Bartash on the MarketWatch website a short time ago:

The Federal Reserve on Wednesday held its asset purchase program steady, putting off any decision for tapering until later in the year in a decision that surprised markets.

By a vote of 9-to-1, the Fed held its bond-buying program at $85 billion, citing tighter financial conditions

The move surprised economists…

“Surprised” is likely an understatement. Get a load of the following from the past week or so:

Nearly three-quarters of the 69 economists polled after Friday’s mixed jobs data expect the Fed to announce a taper to its quantitative easing (QE) program after its September 17-18 meeting.

-Deepti Govind, Reuters website, September 10

A majority of economists surveyed by The Wall Street Journal—66% of the 47 who responded—expect the Federal Reserve to say at next week’s policy meeting that it will begin cutting back its bond purchases, a widely anticipated milestone in a period of extraordinary monetary policy.

-Phil Izzo, The Wall Street Journal website, September 12

More than 60% of 44 economists say Fed policymakers will dial back their $85 billion in monthly government bond purchases when they meet Tuesday and Wednesday. Almost a third pick either October or December.

-Paul Davidson and Barbara Hansen, USA TODAY website, September 15

Among 64 economists surveyed by Bloomberg News, 33 predict the Fed will reduce its purchases of Treasuries by $5 billion or less, with 31 forecasting a cut of $10 billion or more.

-Emma Charlton and Lukanyo Mnyanda, Bloomberg, September 18, 2013

Too funny. I particularly like that last bit on Bloomberg.com. All 64 economists surveyed got the September “tapering” call wrong.

Now, I, for one, wasn’t surprised that the Federal Reserve didn’t dial back on the quantitative easing. Regular readers of Survival And Prosperity shouldn’t have been either. Why’s that? As I’ve been saying since November 22, 2010, in this blog and Memorial Day Weekend, 2007, in its predecessor (Boom2Bust.com, “The Most Hated Blog On Wall Street”)…

The U.S. economy and larger financial system are significantly worse off than the government and the Fed are letting on.

Ben Bernanke and the Federal Reserve are particularly aware of this, which leads me to believe that any tapering down the road, if it happens, is likely to be a drop in the bucket. If a significant decrease in bond purchases does per chance occur, it will likely be cancelled out by additional buying down the road once the economy and larger financial system show visible signs of faltering.

I’m starting to believe it’s QE∞ from now until America finally hits the proverbial brick wall. It’s been decades in the making (1982-2007 credit binge sticks out here), with both major national political parties in on it, and I’m pretty sure there’s no way of stopping the financial crash at this point in time.

Only preparing for it looks to be the remaining smart option left.

What a shame.

By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)

Source:

Robb, Greg and Bartash, Jeffry. “In surprise, Fed decides not to taper.” MarketWatch. 18 Sep. 2013. (http://www.marketwatch.com/story/in-surprise-fed-decides-not-to-taper-2013-09-18). 18 Sep. 2013.

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Dallas Fed Says ‘Great Recession’ Cost U.S. Between $6 Trillion And $14 Trillion

Earlier today, I got wind of a new research publication from David Luttrell, Tyler Atkinson, and Harvey Rosenblum over at the Federal Reserve Bank of Dallas.

Their study looked at the “cost,” or value of what American society gave up, during the recent “Great Recession.”

From “Assessing the Costs and Consequences of the 2007–09 Financial Crisis and Its Aftermath”:

A confluence of factors produced the December 2007–June 2009 Great Recession—bad bank loans, improper credit ratings, lax regulatory policies and misguided government incentives that encouraged reckless borrowing and lending.

The worst downturn in the United States since the 1930s was distinctive. Easy credit standards and abundant financing fueled a boom-period expansion that was followed by an epic bust with enormous negative economic spillover.

Despite extensive reviews of the causes and consequences of the most recent financial crisis, there are few estimates of what it cost—the value of what society gave up. Such a figure would help determine the relative expense of policy proposals designed to avoid future crises.

Luttrell, Atkinson, and Rosenblum’s estimate of what the financial crisis cost?

Between $6 trillion and $14 trillion.

It’s an interesting read, and just like tomorrow’s 12th anniversary of the 9/11 terror attacks, a stark reminder of that tumultuous latter part of the decade and what misguided economic policies did and will do again to “too big to fail” America.

And keep this in mind:

The jokers that caused that mess are the same ones still trying to clean it up.

Some say “recovery.” I say, “papered-over.”

Anyway, the research can be read in its entirety over at the Dallas Fed’s website here.

By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)

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Chicago ‘National Poster Child For Financial Distress’?

Whew. After spending a good deal of the day Saturday at a birthday party for one of my girlfriend’s sisters, I was pretty sore the next morning when I hobbled down my driveway to retrieve the Sunday paper. After a little breakfast, I busted out the “Business” section of the Chicago Tribune and read the following in the weekly finance/investing column by Gail MarksJarvis. She wrote:

Chicago is receiving the type of notoriety no city would want. And its reputation is undermining investments individuals have made in the city’s municipal bonds.

Chicago has become a national poster child for financial distress in the aftermath of the Detroit bankruptcy, as bond analysts have been warning investors about cities and states that could be financially risky in the future.

(Editor’s note: Italics added for emphasis)

Whoa! My reaction was similar to comedian Jeff Foxworthy’s when an audience member approached him and asked if he would be interested in hearing a story about a beaver biting off a man’s nipple:

“Okay, you’ve got my undivided attention.”

Now, it’s not like MarksJarvis is one of those financial “journalists” who see America- especially Obama’s America- through rose-colored glasses and dare not scratch the surface of an economic portrait constructed by a government which has a history of tinkering with the reporting that not surprisingly ends up looking more positive. Unlike these Pollyannas- I have no beef with MarksJarvis and read her column when I get the time (along with Tribune real estate reporter Mary Umberger).

MarksJarvis continued:

“Between Chicago’s appalling murder rate, blubbery unfunded pensions and ratings downgrades, don’t touch this credit with a 10 foot pole,” Marilyn Cohen, chief executive of Envision Capital, wrote in a report to clients this week.

The Los Angeles-based bond manager warned individuals not to be lured by the extra yield they can earn by taking chances on risky cities and states.

“Illinois, Chicago and Puerto Rico are on the bottom of the barrel,” she said. “The Chicago murder rate is a symptom of the city unable to grapple with its problems or its pension debacle. The unions have a stranglehold on the city and state and no one has been willing to raise revenue or do what needs to be done.”

Cohen is just one of many analysts waiving red flags over Chicago municipal bonds since Detroit filed for bankruptcy and made investors aware that large U.S. cities may become so troubled that individuals can lose money in general obligation bonds they assumed were rock solid.

(Editor’s note: Italics added for emphasis)

Funny. From what I’ve heard/read, Cohen might want to look at tossing her home state of California into that barrel as well.

Regardless, a no-holds-barred assessment of Chicago and Illinois as it relates to their bonds.

“Don’t touch this credit with a 10 foot pole.”

Ouch!

Oh well. It’s money we’re talking about here.

“No time for love, Dr. Jones.”

Now, after Detroit filed for bankruptcy last month, a number of people rushed to Chicago’s defense against claims the “Windy City” might be/is on the path of becoming the next “Motor City.” From my Sunday paper:

Bond analysts note that if the city can’t control crime and residents move out, Chicago eventually could face the urban flight issue that left Detroit with the need to spend more on safety while the number of homeowners paying taxes was in decline.

“Chicago eventually could face the urban flight issue.”

It’s an issue already on the table. Not only has it happened before (I once worked with a suburban firefighter whose family made the difficult choice of leaving Chicago’s deteriorating West Side in the late 60s-early 70s for the northwest suburban “boonies” at that time), but the argument can be made that’s it’s starting again, as I type away on my keyboard here in my new home office (in progress) in the northwest suburbs and knowing of other ex-city dwellers who’ve departed what they feel has become “Rahmabad” (as I just heard Chicago being referred to this weekend) while making their presence known on alternative media sites like Second City Cop and others.

While not a flood, there’s a trickle.

By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)

Source:

MarksJarvis, Gail. “MarksJarvis: Chicago gives investors another reason to rethink municipal bonds.” Chicago Tribune. 4 Aug. 2013. (http://articles.chicagotribune.com/2013-08-04/business/ct-biz-0804-gail-bonds–20130804_1_municipal-bonds-municipal-market-advisors-matt-fabian). 4 Aug. 2013.

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Chicago’s Really Bad Week

The past week has been quite a crappy one for Chicago, Illinois, as it concerns their finances and schools. But none of the bad news should surprise regular readers of this blog. From the website of bond credit rating giant Moody’s Investor Service late Wednesday night:

Moody’s Investors Service has downgraded the City of Chicago’s (IL) general obligation (GO) and sales tax ratings to A3 from Aa3; water and sewer senior lien revenue ratings to A1 from Aa2; and water and sewer second lien revenue ratings to A2 from Aa3. Chicago has $7.7 billion of GO debt, $566 million of sales tax debt, $2.0 billion of water revenue debt, and $1.3 billion of sewer revenue debt outstanding. The outlook on all ratings is negative.

It wasn’t long ago that I blogged about Moody’s warning the “Windy City” of a possible credit rating downgrade. From their website on April 17, 2013:

Moody’s has announced its final approach to the way it will analyze and adjust pension liabilities as part of its credit analysis of state and local governments. These changes reflect the rating agency’s view that pension obligations are a significant source of credit pressure for governments and warrant a more conservative view of the potential size of the obligations. As a result of this new approach, Moody’s has also placed the general obligation ratings of the cities of Chicago, Cincinnati, Minneapolis, and Portland, OR, and of 25 other US local governments and school districts on review for possible downgrade. The entities whose ratings have been placed on review have large adjusted net pension liabilities relative to their rating category…

Moody’s rates over 8,000 local governments in the United States. Less than 1% of those with general obligation or equivalent ratings have been placed under review because of the new pension adjustments.

I’ve been pointing out Chicago’s financial woes for some time now- despite City Hall’s claim that “all’s well.” I wrote on July 25, 2012:

There’s good news and bad news out concerning Chicago’s finances.

The good news is that the city has more cash on hand these days due to Mayor Rahm Emanuel’s cost-cutting.

The bad news is that the Windy City is falling deeper into debt.

Fran Spielman wrote on the Chicago Sun-Times website Sunday:

Mayor Rahm Emanuel closed the books on 2011 with $310 million in cash on hand, $167 million more than the year before, but added $465 million to the mountain of debt piled on Chicago taxpayers, year-end audits show…

The new round of borrowing brings Chicago’s total long-term debt to just over $27 billion. That’s $10,000 for every one of the city’s nearly 2.7 million residents. More than a decade ago, the debt load was $9.6 billion or $3,338-per-resident.

(Editor’s note: Italics added for emphasis)

The City of Chicago’s response? From the piece:

“Is it troubling? The answer is, ‘no.’ We still have a very strong bond rating. Our fiscal position is getting better every year and we are aggressively managing our liabilities and obligations,” City Comptroller Amer Ahmad said Friday, the same day that Moody’s Investor’s Service downgraded $6.8 billion in O’Hare Airport bonds.

So much for that “very strong bond rating.”

As for the Chicago public schools? Remember this post from September 13, 2012?:

By now, many of you have probably heard about the teachers strike going on in Chicago. Day 4 and counting. While many Chicago public school teachers are probably worth every red cent of the $71,017 median salary they command- and more- when all things are considered, considering the precarious financial situation of the Chicago Public Schools, a larger crisis looks to be right around the corner. Rosalind Rossi wrote on the Chicago Sun-Times website yesterday:

As school and union leaders wrestled over a new teachers contract Tuesday, a huge, nagging question loomed in the background:

Once they finish, how will Chicago Public Schools pay for any new contract they forge?

There’s no easy give in the budget, because CPS already depleted its rainy day “reserve” fund to help plug a $665 million deficit this school year.

And if officials eke out enough cuts to pay for the cost of teacher raises this school year, a $1 billion deficit — and no “reserve” cushion — awaits them next school year, when a pension relief package expires.

(Editor’s note: Italics added for emphasis)

$1 billion deficit next year and no reserve funds left?

Besides significant cuts, there’s already been talk of massive teacher layoffs, larger class sizes, and higher taxes being required in the near future.

Time will tell how this all plays out.

Time looks to be up. From Noreen S. Ahmed-Ullah and Kim Geiger on the Chicago Tribune website this morning:

Citing a $1 billion budget deficit, Chicago Public Schools will lay off more than 2,000 employees, more than 1,000 of them teachers, the district said Thursday night.

About half of the 1,036 teachers being let go are tenured. The latest layoffs, which also include 1,077 school staff members, are in addition to 855 employees — including 420 teachers — who were laid off last month as a result of the district’s decision to close 49 elementary schools and a high school program.

I love Chicago, and I wish only the best for the neighbors I just recently left behind. But one word comes to mind right now as I look back at everything I’ve just typed:

Devolution.

Here’s hoping next week is a better one for the “City by the Lake.”

You can read the Moody’s downgrade notice on their website here.

By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)

Source:

Geiger, Kim and Ahmed-Ullah, Noreen S. “CPS lays off more than 2,000, including 1,000 teachers.” Chicago Tribune. 19 July 2013. (http://www.chicagotribune.com/news/education/ct-met-cps-layoffs-20130719,0,4180625.story). 19 July 2013.

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City Of Chicago On Review For ‘Possible Downgrade’ By Moody’s

“We still have a very strong bond rating. Our fiscal position is getting better every year and we are aggressively managing our liabilities and obligations.”

-City of Chicago Comptroller Amer Ahmad, July 20, 2012, as noted in a July 22, 2012, Chicago Sun-Times article

I’ve been warning Survival And Prosperity readers for some time that the City of Chicago’s finances are not as peachy keen as City Hall would like outsiders to believe.

So much so, the City’s credit rating is on review for a possible downgrade by Moody’s Investors Service. From the Moody’s website earlier today:

Moody’s has announced its final approach to the way it will analyze and adjust pension liabilities as part of its credit analysis of state and local governments. These changes reflect the rating agency’s view that pension obligations are a significant source of credit pressure for governments and warrant a more conservative view of the potential size of the obligations. As a result of this new approach, Moody’s has also placed the general obligation ratings of the cities of Chicago, Cincinnati, Minneapolis, and Portland, OR, and of 25 other US local governments and school districts on review for possible downgrade. The entities whose ratings have been placed on review have large adjusted net pension liabilities relative to their rating category…

Moody’s rates over 8,000 local governments in the United States. Less than 1% of those with general obligation or equivalent ratings have been placed under review because of the new pension adjustments.

(Editor’s note: Italics added for emphasis)

Great. Chicago is in another “select group” it really doesn’t want to belong to these days.

You can read the entire announcement on the Moody’s website here.

By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)

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Nouriel Roubini Warns Stocks Could Correct

Another “Dr. Doom” is talking of a stock market correction these days.

Nouriel Roubini, co-founder and chairman of Roubini Global Economics, spoke with CNBC Europe from Lake Como, Italy, last Friday. The former Treasury official in the Clinton administration, who correctly-called the 2008 global financial crisis, talked about the U.S. economy and larger financial system. “Dr. Doom” told viewers don’t expect quantitative easing to go away anytime soon:

Increasingly QE has less effects really on the economy. There is some credit creation right now. There is a positive and so on. But certainly it is becoming ineffective. The trouble is if you take away QE very fast you could have a significant back up in long rates, and that’s going to essentially kill the recovery in its tracks. Therefore, the Fed has no choice but maintaining QE3 for as far as I can see.

(Editor’s note: Italics added for emphasis)

In addition, the professor of economics at NYU warned of a possible correction in stocks later this year:

Down the stream, second half of the year, the U.S. stock market could correct somehow.


“Roubini Warns on US Economy”
YouTube Video

Definitely more subdued than the other “Doctor Dooms”- Marc Faber and Peter Schiff- on the near-term prospects for the U.S. economy and financial markets.

By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)

(Editor’s note: I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein)

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